Too much leverage in the stock market provides the fuel for meltdowns. You simply have to remain rational and let the fire burn out.
The Fed stepped in and provided a drizzle to quench the fire storm in the form of a discount rate cut of 50 basis points. The market has responded favorably so far. The discount rate cut was welcome, but it’s not enough. They will certainly cut the federal funds rate at the October FOMC meeting, if not before. The timing will be controlled by future circumstances.
I would not rule out the possibility that they could cut the fed funds rate in a surprise announcement between meetings. It is rare, but it has happened in the past--especially if they see an immediate need to avert further calamity.
I think we are already in a recession. I expect it to be powerful, but I don’t see it affecting the global demand for raw materials. Domestic demand for energy will continue to increase, regardless of a recession.
The EIA reported global oil consumption increased 1.4 millions of barrels per day during the second quarter of 2007 compared with levels a year ago. Meanwhile, production is falling in Venezuela, Iraq, Iran, Indonesia, Libya, Nigeria, Kuwait, Mexico and Russia. Saudi Arabia is pushing on a string to maintain production at current levels.
Also, new production that is brought on line to replace mature light crude is predominantly “difficult to refine” sour crude.
Prices do not run linearly. They zig-zag. Crude moved to $78 recently, which was essentially the old 2006 high, and everyone turned bullish. We forecast a technical correction back to $69.
Due to the opportunity handed to us by the mindless liquidation over the last couple of weeks, it really doesn’t matter at this point. You need to be investing now for $100 oil in the future.
How do you invest for $100 oil? The best avenue is to seek those situations that make money as a consequence of $100 oil, not necessarily those that produce it. The exception is Apache. It fell as low as $72.65 recently, and purchases up to $78 are recommended. Apache is the one major that should be in your portfolio.
Balance your portfolio with Frontier Oil and Valero. These refiners are unique in that they can process sour crude, and they are selling close to our downside buy prices. Both deserve a place in a diversified energy portfolio.
If you are hungry for yield, Blackrock Global Energy is still selling just below our downside buy price. Buy BGR up to $28 for a yield of about 5.4%. You can get nearly 6.8% with KinderMorgan, but go easy with this one. I am still a little nervous about where Congress might go in their desire to tax partnerships.
You will see some of your dividends sheltered from taxes, but there is also a bit of extra accounting you will have to do on your tax forms due to the fact that this is a partnership and not a corporation.
Perhaps the best returns are in shipping crude. The two shippers on our list look great here. Nordic American yields about 12.8% at this price, and Frontline yields about 14.3%. The caveat is that these dividends are not consistent quarter to quarter. They fluctuate. Nevertheless, you should have a few shares of each of these in your energy portfolio.
Frontline has promised $0.625 as a regular quarterly dividend. They have also been paying an extra dividend (reflected in the 14.3%). The board has left the decision up to the directors on a quarter-to-quarter basis as to whether to use excess cash for an extra dividend or for another purpose like stock buybacks.
Transocean also deserves a central place in your positioning for $100 oil. I have raised our buy price to $100 for RIG. Don’t be put off by the $100 per share price. Investing is a matter of percentages. If you buy 100 shares of a $25.00 stock or 25 shares of a $100.00 stock, the investment is the same. If either doubles, you will have doubled you money, regardless of how many shares you buy.
Via: Forbesby Curtis Hesler
